We tend to favor the fund offerings of Dimensional Fund Advisors (DFA) and The Vanguard Group. While we do not use their funds exclusively (and have no financial ties to either), they are both “best in class” for what they do and we are drawn to them for both philosophical and “performance” reasons.

Vanguard. Vanguard was founded in 1975 by John Bogle who was a prolific writer about the benefits of low-cost, highly diversified portfolios, as well as the need for investors to take a long-term perspective. Under Bogle’s leadership, Vanguard introduced the first-ever index fund, the Vanguard First Index Investment Trust, to track the performance of the S&P 500. Vanguard is the largest mutual-fund issuer in the world, the second largest ETF issuer in the world and continues to be the industry leader in low-cost, “pure” index funds.

What truly makes Vanguard unique, however, is its ownership structure. Vanguard is owned by its funds which, in turn, are owned by the funds’ shareholders. In short, Vanguard is a company owned by its investors. Talk about alignment of interests!

Dimensional Fund Advisors. Founded in 1981, DFA was formed to take advantage of research done by Nobel Laureate Eugene Fama ( the “father of modern finance”) and Kenneth French. Their groundbreaking work identified certain “factors” that account for the majority of stock market returns and, in particular, what are known as the value and small-cap premiums.

At one point dubbed “one of the best kept secrets in the mutual fund industry”, DFA’s claim to fame continues to be it’s ability to capture the value and small-cap premiums better than any other fund company. 

Initially, DFA provided their services only to institutional investors. They then opened their doors to a relatively small group of investment advisors (including the founder of Planvesting) who could demonstrate a deep understanding of their research and “passive” investment strategies. Passive strategies, such as the use of index funds, have proven to offer superior risk-adjusted returns vs. active strategies. But, unlike Vanguard, DFA, is not a traditional issuer of Index Funds.

In fact, in recent years DFA has rejected the “passive” moniker and started describing themselves as active fund managers (which, if you’ve gotten this far, you know is an approach to portfolio management that we generally reject). But are they really active managers? Well, no – at least not in the traditional sense of the moniker. What they are is a “quant shop” that follows a very strict set of rules to capture the premiums they are pursuing. Much like a typical index fund follows a strict set of pre-defined rules to mimic the benchmark it’s tracking (e.g., the S&P500), DFA also programmatically follows a pre-defined set of rules. 

To use their own words: “Dimensional delivers the benefits of indexing but goes beyond by systematically targeting research-backed drivers of higher-expected returns”. In other words, unlike typical active managers, they’re not trying to outguess the market by relying on predictions to find mispriced securities. They’re simply taking advantage of well-known factors in the most (cost) effective way possible.